1.1– Breaking the Ice

As with any of the previous modules in Varsity, we will again make the same old assumption that you are new to options and therefore know nothing about options. For this reason we will start from scratch and slowly ramp up as we proceed. Let us start with running through some basic background information.

The options market makes up for a significant part of the derivative market, particularly in India. I would not be exaggerating if I were to say that nearly 80% of the derivatives traded are options and the rest is attributable to the futures market. Internationally, the option market has been around for a while now, here is a quick background on the same –

Custom options were available as Over the Counter (OTC) since the 1920’s. These options were mainly on commodities

Options on equities began trading on the Chicago Board Options Exchange (CBOE) in 1972

Options on currencies and bonds began in late 1970s. These were again OTC trades

Exchange-traded options on currencies began on Philadelphia Stock Exchange in 1982

Interest rate options began trading on the CME in 1985

Clearly the international markets have evolved a great deal since the OTC days. However in India from the time of inception, the options market was facilitated by the exchanges. However options were available in the off market ‘Badla’ system. Think of the ‘badla system’ as a grey market for derivatives transactions. The badla system no longer exists, it has become obsolete. Here is a quick recap of the history of the Indian derivative markets –

June 12th 2000 – Index futures were launched

June 4th 2001 –Index options were launched

July 2nd 2001 – Stock options were launched

November 9th 2001 – Single stock futures were launched.

Though the options market has been around since 2001, the real liquidity in the Indian index options was seen only in 2006! I remember trading options around that time, the spreads were high and getting fills was a big deal. However in 2006, the Ambani brothers formally split up and their respective companies were listed as separate entities, thereby unlocking the value to the shareholders. In my opinion this particular corporate event triggered vibrancy in the Indian markets, creating some serious liquidity. However if you were to compare the liquidity in Indian stock options with the international markets, we still have a long way to catch up.

1.2 – A Special Agreement

There are two types of options – The Call option and the Put option. You can be a buyer or seller of these options. Based on what you choose to do, the P&L profile changes. Of course we will get into the P&L profile at a much later stage. For now, let us understand what “The Call Option” means. In fact the best way to understand the call option is to first deal with a tangible real world example, once we understand this example we will extrapolate the same to stock markets. So let’s get started.

Consider this situation; there are two good friends, Ajay and Venu. Ajay is actively evaluating an opportunity to buy 1 acre of land that Venu owns. The land is valued at Rs.500,000/-. Ajay has been informed that in the next 6 months, a new highway project is likely to be sanctioned near the land that Venu owns. If the highway indeed comes up, the valuation of the land is bound to increase and therefore Ajay would benefit from the investment he would make today. However if the ‘highway news’ turns out to be a rumor- which means Ajay buys the land from Venu today and there is no highway tomorrow, then Ajay would be stuck with a useless piece of land!

So what should Ajay do? Clearly this situation has put Ajay in a dilemma as he is uncertain whether to buy the land from Venu or not. While Ajay is muddled in this thought, Venu is quite clear about selling the land if Ajay is willing to buy.

Ajay wants to play it safe, he thinks through the whole situation and finally proposes a special structured arrangement to Venu, which Ajay believes is a win-win for both of them, the details of the arrangement is as follows –

Ajay pays an upfront fee of Rs.100,000/- today. Consider this as a non refundable agreement fees that Ajay pays

Against this fees, Venu agrees to sell the land after 6 months to Ajay

The price of the sale( which is expected 6 months later) is fixed today at Rs.500,000/-

Because Ajay has paid an upfront fee, only he can call off the deal at the end of 6 months (if he wants to that is), Venu cannot

In the event Ajay calls off the deal at the end of 6 months, Venu gets to keep the upfront fees

So what do you think about this special agreement? Who do you think is smarter here – Is it Ajay for proposing such a tricky agreement or Venu for accepting such an agreement? Well, the answer to these questions is not easy to answer, unless you analyze the details of the agreement thoroughly. I would suggest you read through the example carefully (it also forms the basis to understand options) – Ajay has plotted an extremely clever deal here! In fact this deal has many faces to it.

Let us break down Ajay’s proposal to understand some details –

By paying an agreement fee of Rs.100,000/-, Ajay is binding Venu into an obligation. He is forcing Venu to lock the land for him for the next 6 months

Ajay is fixing the sale price of the land based on today’s price i.e Rs.500,000/- which means irrespective of what the price would be 6 months later he gets to buy the land at today’s price. Do note, he is fixing a price and paying an additional Rs.100,000/- today

At the end of the 6 months, if Ajay does not want to buy the land he has the right to say ‘no’ to Venu, but since Venu has taken the agreement fee from Ajay, Venu will not be in a position to say no to Ajay

The agreement fee is non negotiable, non refundable

Now, after initiating this agreement both Ajay and Venu have to wait for the next 6 months to figure out what would actually happen. Clearly, the price of the land will vary based on the outcome of the ‘highway project’. However irrespective of what happens to the highway, there are only three possible outcomes –

Once the highway project comes up, the price of the land would go up, say it shoots up to Rs.10,00,000/-

The highway project does not come up, people are disappointed, the land price collapses, say to Rs.300,000/-

Nothing happens, price stays flat at Rs.500,000/-

I’m certain there could be no other possible outcomes that can occur apart from the three mentioned above.

We will now step into Ajay’s shoes and think through what he would do in each of the above situations.

Scenario 1 – Price goes up to Rs.10,00,000/-

Since the highway project has come up as per Ajay’s expectation, the land price has also increased. Remember as per the agreement, Ajay has the right to call off the deal at the end of 6 months. Now, with the increase in the land price, do you think Ajay will call off the deal? Not really, because the dynamics of the sale are in Ajay’s favor –

Current Market price of the land = Rs.10,00,000/-

Sale agreement value = Rs.500,000/-

This means Ajay now enjoys the right to buy a piece of land at Rs.500,000/- when in the open market the same land is selling at a much higher value of – Rs.10,00,000/-. Clearly Ajay is making a steal deal here. Hence he would go ahead and demand Venu to sell him the land. Venu is obligated to sell him the land at a lesser value, simply because he had accepted Rs.100,000/- agreement fees from Ajay 6 months earlier.

Another way to look at this is – For an initial cash commitment of Rs.100,000/- Ajay is now making 4 times the money! Venu even though very clearly knows that the value of the land is much higher in the open market, is forced to sell it at a much lower price to Ajay. The profit that Ajay makes (Rs.400,000/-) is exactly the notional loss that Venu would incur.

Scenario 2 – Price goes down to Rs.300,000/-

It turns out that the highway project was just a rumor, and nothing really is expected to come out of the whole thing. People are disappointed and hence there is a sudden rush to sell out the land. As a result, the price of the land goes down to Rs.300,000/-.

So what do you think Ajay will do now? Clearly it does not make sense to buy the land, hence he would walk away from the deal. Here is the math that explains why it does not make sense to buy the land –

Remember the sale price is fixed at Rs.500,000/-, 6 months ago. Hence if Ajay has to buy the land he has to shell out Rs.500,000/- plus he had paid Rs.100,000/- towards the agreement fees. Which means he is in effect paying Rs.600,000/- to buy a piece of land worth just Rs.300,000/-. Clearly this would not make sense to Ajay, since he has the right to call of the deal, he would simply walk away from it and would not buy the land. However do note, as per the agreement Ajay has to let go of Rs.100,000/-, which Venu gets to pocket.

Scenario 3 – Price stays at Rs.500,000/-

For whatever reasons after 6 months the price stays at Rs.500,000/- and does not really change. What do you think Ajay will do? Well, he will obviously walk away from the deal and would not buy the land. Why you may ask, well here is the math –

Cost of Land = Rs.500,000/-

Agreement Fee = Rs.100,000/-

Total = Rs.600,000/-

Value of the land in open market = Rs.500,000/-

Clearly it does not make sense to buy a piece of land at Rs.600,000/- when it is worth Rs.500,000/-. Do note, since Ajay has already committed 1lk, he could still buy the land, but ends up paying Rs 1lk extra in this process. For this reason Ajay will call off the deal and in the process let go of the agreement fee of Rs.100,000/- (which Venu obviously pockets).

I hope you have understood this transaction clearly, and if you have then it is good news as through the example you already know how the call options work! But let us not hurry to extrapolate this to the stock markets; we will spend some more time with the Ajay-Venu transaction.

Here are a few Q&A’s about the transaction which will throw some more light on the example –

Why do you think Ajay took such a bet even though he knows he will lose his 1 lakh if land prices does not increase or stays flat?

Agreed Ajay would lose 1 lakh, but the best part is that Ajay knows his maximum loss (which is 1 lakh) before hand. Hence there are no negative surprises for him. Also, as and when the land prices increases, so would his profits (and therefore his returns). At Rs.10,00,000/- he would be making Rs.400,000/- profit on his investment of Rs.100,000/- which is 400%.

Under what circumstances would a position such as Ajay’s make sense?

Only that scenario when the price of the land increases

Under what circumstances would Venu’s position makes sense

Only that scenario when the price of the land decreases of stays flat

Why do you think Venu is taking such a big risk? He would lose a lot of money if the land prices increases after 6 months right?

Well, think about it. There are only 3 possible scenarios, out which 2 indeed benefit Venu. Statistically, Venu has 66.66% chances of winning the bet as opposed to Ajay’s 33.33% chance

Let us summarize a few important points now –

The payment from Ajay to Venu ensures that Ajay has a right (remember only he can call off the deal) and Venu has an obligation (if the situation demands, he has to honor Ajay’s claim)

The outcome of the agreement at termination (end of 6 months) is determined by the price of the land. Without the land, the agreement has no value

Land is therefore called an underlying and the agreement is called a derivative

An agreement of this sort is called an “Options Agreement”

Since Venu has received the advance from Ajay, Venu is called the ‘agreement seller or Writer’ and Ajay is called the ‘agreement buyer’

In other words since this agreement is called “an options agreement”, Ajay can be called an Options Buyer and Venu the Options Seller/writer.

The agreement is entered after the exchange of 1 lakh, hence 1 lakh is the price of this option agreement. This is also called the “Premium” amount

Every variable in the agreement – Area of the land, price and the date of sale is fixed.

As a thumb rule, in an options agreement the buyer always has a right and the seller has an obligation

I would suggest you be absolutely thorough with this example. If not, please go through it again to understand the dynamics involved. Also, please remember this example, as we will revisit the same on a few occasions in the subsequent chapters.

Let us now proceed to understand the same example from the stock market perspective.

1.3 – The Call Option

Let us now attempt to extrapolate the same example in the stock market context with an intention to understand the ‘Call Option’. Do note, I will deliberately skip the nitty-gritty of an option trade at this stage. The idea is to understand the bare bone structure of the call option contract.

Assume a stock is trading at Rs.67/- today. You are given a right today to buy the same one month later, at say Rs. 75/-, but only if the share price on that day is more than Rs. 75, would you buy it?. Obviously you would, as this means to say that after 1 month even if the share is trading at 85, you can still get to buy it at Rs.75!

In order to get this right you are required to pay a small amount today, say Rs.5.0/-. If the share price moves above Rs. 75, you can exercise your right and buy the shares at Rs. 75/-. If the share price stays at or below Rs. 75/- you do not exercise your right and you do not need to buy the shares. All you lose is Rs. 5/- in this case. An arrangement of this sort is called Option Contract, a ‘Call Option’ to be precise.

After you get into this agreement, there are only three possibilities that can occur. And they are-

The stock price can go up, say Rs.85/-

The stock price can go down, say Rs.65/-

The stock price can stay at Rs.75/-

Case 1 – If the stock price goes up, then it would make sense in exercising your right and buy the stock at Rs.75/-.

The P&L would look like this –

Price at which stock is bought = Rs.75

Premium paid =Rs. 5

Expense incurred = Rs.80

Current Market Price = Rs.85

Profit = 85 – 80 = Rs.5/-

Case 2 – If the stock price goes down to say Rs.65/- obviously it does not makes sense to buy it at Rs.75/- as effectively you would spending Rs.80/- (75+5) for a stock that’s available at Rs.65/- in the open market.

Case 3 – Likewise if the stock stays flat at Rs.75/- it simply means you are spending Rs.80/- to buy a stock which is available at Rs.75/-, hence you would not invoke your right to buy the stock at Rs.75/-.

This is simple right? If you have understood this, you have essentially understood the core logic of a call option. What remains unexplained is the finer points, all of which we will learn soon.

At this stage what you really need to understand is this – For reasons we have discussed so far whenever you expect the price of a stock (or any asset for that matter) to increase, it always makes sense to buy a call option!

Now that we are through with the various concepts, let us understand options and their associated terms

Variable

Ajay – Venu Transaction

Stock Example

Remark

Underlying

1 acre land

Stock

Do note the concept of lot size is applicable in options. So just like in the land deal where the deal was on 1 acre land, not more or not less, the option contract will be the lot size

Expiry

6 months

1 month

Like in futures there are 3 expiries available

Reference Price

Rs.500,000/-

Rs.75/-

This is also called the strike price

Premium

Rs.100,000/-

Rs.5/-

Do note in the stock markets, the premium changes on a minute by minute basis. We will understand the logic soon

Regulator

None, based on good faith

Stock Exchange

All options are cash settled, no defaults have occurred until now.

Finally before I end this chapter, here is a formal definition of a call options contract –

“The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or “writer”) is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right”.

In the next chapter we will look into a few finer details with regard to the ‘Call Option’.

Key takeaways form this chapter

Options are traded in the Indian markets for over 15 years, but the real liquidity was available only since 2006

An Option is a tool for protecting your position and reducing risk

A buyer of the call option has the right and the seller has an obligation to make delivery

The option is only given to one party in the transaction ( buyer of an option)

The option seller is also called the option writer

At the time of agreement the option buyer pays a certain amount to the option seller, this is called the ‘Premium’ amount

The agreement happens at a pre specified price, often called the ‘Strike Price’

The option buyer benefits only if the price of the asset increases higher than the strike price

If the asset price stays at or below the strike, the buyer does not benefit, for this reason it always makes sense to buy options when you expect the price to increase

Statistically the option seller has higher odds of winning in an typical option contract

The directional view has to pan out before the expiry date, else the option will expire worthless

1. Why is it then that you have mentioned that like futures there are 3 expiries available?

2. The dropdown value on the NSE website does not contain all months expiries – after 18th May 2015 we have 25th June 2015 followed by 24th Sept 2015 and then 31st Dec 2015. What happened to the other months? For 2016 to 2019 only June and Dec contracts are available. What happened to the remaining?

Saurabh, glad you noticed it! For all stocks options the expiry is very similar to futures. Hence we have current month, mid month, and far month contracts. However for Nifty there are several different expiry options. If you notice, these are long dated options with expiry in 2016, 2019 etc…options that are long dated has a special name for it, its called ‘Leaps’. So if you are talking about Nifty 8800 Call Option expiring in Dec 2019, then that is a Nifty Leap contract. Leaps are good if you have a super long term view on markets. However the problem with leaps in India is that they are not liquid, there are hardly any trading activity here.

As far as your send queries goes, honestly I’m not sure why the contracts are so irregular. Guess I will find out the reason and get back to you on that 🙂

Share Spot Price=>67
Buy call 90 [email protected] of 5(Deep OTM option), Target on the same day
If the premium increase from 5 to 8 can i exercise the option?
Whether profit will be 3(8-5) or -2(8-5-5)
can u clarify the profit based on premium not SP?

Sir, thanks for the easy concept on option. What I understand we can square off any position in option too before expiry date if profit is decent or stop loss set is triggered, in liquid stocks. Only the thing is that we have to pay the brokerage twice. Is it that we can not put SL for options?
One more clarification I want to get is that the options are exercised means we have buy the underlying asset or the price difference will be adjusted in cash in case of the share market?

That means we can square off at any point of time (before or on expiry)
1. Before expiry we have to pay the brokerage twice.
2. On the expiry no brokerage but we have to do it by our own
3. Else exchange will exercise that option on our behalf and charge huge penalty.
1 confusion i have here is
Exercise the option on expiry day means square off the option on expiry day?

Is there any specific process on zerodha to buy a XYZ stock at strice price or exercise the options. OR a normal stock purchase transaction on expiry day will be treated as exercise? For ex : I have INFYTECH May 980 CE and if I want to exercise INFYTECH stock on exipry day. what is the process to do so?

As usual Karthik at his best starting with options…only concern is the time taken to upload other chapters..: (…hoping to see other chapters at the earliest.Thanks once again Karthik for your splendid efforts…

Hi Karthik!! I have been following the lessons for 3-4 months now and heartfully thank you for them.. I wait for the each chapter to be published with great enthusiasm.. I found your TA chapters very helpful and easy to understand.. It would have been great if beginners like me could have had a paper trading platform where they could try their hands before with TA based trading..

Thanks for the kind words Rohit. It is gratifying for us to know that people are indeed benefiting from these modules. We don’t have a simulator as such (for now), but I agree its a good idea. We try and do something about this.

For Ex – Assume that i’ll buy 1 Lot Tatasteel Fut at 300 and i’ll also buy 1 lot Tatasteel 300PE at 10.00, now since my trade is hedged, how do you calculate margin requirements.
Also, since Futures are MTM Calculated, does 300PE will offset the losses of futures on MTM basis.

Since 300PE is out of the money option you will not get much margin benefit, however if you select in the money option (330 PE) there is margin benefit for the same. In fact the margin to buy 1 lot Tata steel is approximately 20K, add to this 300PE, you get about Rs.200/- margin benefit, however instead you buy 330PE the margin benefit is close to 7k and hence only 13K is required for the futures trade.

Generally speaking buying a call option should not be an alternative to buying in spot market. However if the decision is to buy Infy for a short term (few days) then maybe one can explore the idea of buying the call options.

Hi Karthik. I can’t thank you enough for the amazing content and taking the time to answer all our questions. I have a couple of questions today(unrelated to options):
1. What is the Bank Nifty’s beta…as in its relationship to the Nifty? There is such a relationship between the two indices, right?
2. On sites like moneycontrol.com, you often have various “expert opinions.” I try to reconcile some of these opinions with my own TA on the Nifty charts. Today, I read this…”The 5-6 percent downside seen in the Indian equity market is not a full fledged correction, it would be a correction only in case the market goes down 10 percent.” What is this 10% number based on? Fibonacci Retracements?

As you may know Beta of Nifty Index is 1 because Nifty is a market portfolio. However Bank Nifty beta should not be considered as 1 as (based on market portfolio theory), the reasons for this are as follows –

1) Beta for market is defined as 1
2) Market is defined as a portfolio of stocks which represents as many diverse sectors as possible
3) Nifty represents 21 different sectors which are of meaningful size and presence in India
4) Hence Nifty is a true market portfolio, therefore its beta is 1

Given this, Bank Nifty on the other hand, even though is an index , it cannot have a beta of 1 like Nifty. This simply because it is not a market index. Bank Nifty is just a representation of the banking sector, which is a subset of Nifty. Hence for this reason it makes sense to calculate beta of Bank Nifty. If you have gone through this chapter – http://zerodha.com/varsity/chapter/hedging-futures/ in section 11.6 I have explained how beta is calculated. Request you to go through the same.

With respect to your 2nd query – generally speaking in a strong bull market the perception is such that they call a correction as a ‘correction’ only if its 10%. But this is not set in stone, their guess or estimate is as good as yours or mine. In fact nothing is set in stone when it comes to market. So please keep an open mind and adapt to events and markets as it evolves.

But this is not set in stone, their guess or estimate is as good as yours or mine. In fact nothing is set in stone when it comes to market. So please keep an open mind and adapt to events and markets as it evolves…….
Very True….We should never listen to anyone on Tv…trades should be done only according to TA….

I just want to know that buying a call or selling a put is same thing from the point of view that when market goes up you will be in profit. But how to select that buying a call is appropriate or selling a put? Same thing is for selling a call and buying a put.
Is it not correct to buy a put rather selling a call to make loss limited?

Well, this depends on the premium. If the premiums are too high then probably selling a Put maybe more profitable than buying a call. Else if the premiums are low buying calls may make more sense than selling a put. There are many factors that drives the premiums…we will understand all these shortly in this module.

“If the stock price goes down to say Rs.65/- obviously it does not makes sense to buy it at Rs.75/- as effectively you would spending Rs.80 (75+5) for a stock that’s available at Rs.75 in the open market.

Likewise if the price goes below Rs.75 it simply means you are spending Rs.80 to buy a stock which is available at Rs.75, hence you would not invoke your right.”

In both the scenarios – in first scenario since the price is 65 – it is available in market at 65 and I will be paying 65 + 5 (premium which is lost in this option deal), supposing that I’m still interested in buying this.

In the second scenario, I guess you mean that the price of the share is flat at 75 rs.

The agreement is to buy the stock at 75, which is also called the strike price. So when the price drops to 65 – you still need to honor the agreement and buy it at 75.
The 2nd scenario is supposed to be flat…will make that change. Thanks for point that out.

is the options calculator on zerodhas nest plus a paid service? that is what i was told by one of your executives. i was also told to contact omnesys who is the service provider for the same. kindly clarify.

sir,
for suppose i paid a premium of 8 rupees per share and lot size is 125. Premium increased to 10 rupees.so i executed the option and my profit will be 2*125=250(excluding charges). Am i right? please correct me if i am wrong

we need a srvice to trade in options whether CE or PE. I do not like to avail of service and pay.Is there any method which i learn so that i trade in options profitably by my self. Suggest me a reading or explain yourself about how to trade profitably in options. I shall read all your chaptrs. I started reading your this site only today on 31St july 2015. usha

Hi Usha – please do not pay for or opt for such services. They are all useless. Starting reading from chapter 1 and progress along…reading and understanding the subject is a 1 time lifetime effort…and after that you will never think of opting for such services.

what is the meaning of ” exercise the option only on the expiry day” i can’t understand, we can buy a option in the day and sell the option in same day and receive the premium same day and we can withdraw the money with in two days then what is option exercise?

Sarath – there are two things here. One is receiving the buying and selling options on the same day (or anytime before expiry)…in this case you will receive or lose money as applicable. The other thing is buying or selling an option and holding it till expiry…if you do this, then it is deemed that you are exercising your options. When you excercise your options you will receive a settlement price (if any) as applicable.

I trade in commodities and there we may or may not have profit but the turn over is in crores. i am a house wife and receive some interest from my Fixed Deposits and also trade in commodities.
Do i need to fill ITR-4. What type of account data i need to hold for incometax purposes. Regards

Sir,I have gone through your TA it is excellent and superb, simple to understand with real time examples.One doubt remains in me regarding Support and Resistance and Trend Analysis.Can you please explain me with an example, what is Major Support area and Medium-Term Support area and Short-Term Support area? And how to differentiate between them?

If the stock touches the price action zone multiple times (3 or more time) across different time periods then that price action zone is called as “major S&R level”….else people just refer to it as medium term S&R level.

What is meant by option will expire worthless on expiry.
Suppose if I bought Nifty CE for strike price of 7500 and on expiry Nifty closed at 7700 level then whether the option buyer will get profit or not.

I’ve purchased Eicher Motors 18000 PE call for a price of 295 on 14/09/2015,when the underlying value is at 18700, on 18/08/2015 the underlying asset value is 18200,bit still the option price went down to 200. Can you please clarify the logic behind option pricing.

Hi, many thanks for the above chapter. My question is:
Nifty call @ 7800 bought at Rs 35
On expiry nifty is 8000. The 7800 call option is trading at 175.
I want to understand what the profit would be if I hold the option till expiry
(A) 175-35 =140 or
(B) 200-35 = 165

1. Do We need to square off the position on expiry day to exercise the option or is it automatic if we are in the money?

2. Why is ITM option is not trading at intrinsic price on the expiry day? Why is it trading a little less than that? Is it due to higher applicable rate of STT on expiry day if ITM option is not squared off?

If suppose i square of this today, what will be my profit. As per my understanding that i’ll get the difference between strike price and spot price (293-280) * 1000=13000-11000 (premium)=2000. Is this correct or is the difference between the premium for this contract on this day for example if LTP premium for this contract is 12 even if the spot price is at 294 and profit will be (12-11)*1000=1000.

The break-even calculation is right. Since you are closing the trade before the expiry your profits will be the amount of premium you pay to buy minus the amount of premium you received while selling it. So in this it would Rs.1000/-.

I see that for options expiring in August 2013 and before, “no records” are available for strikes like XX50. We can get all the historical data for Strikes like XX00 (for example, call/put with strike 5300 expiring on 29 August 2013 data is available. But, historical data for call/put with strike 5250 or 5350 is not available on nse website for August 2013 and earlier months). After August 2013, all data including for strikes XX50 type is available.

Is it by mistake that above kind of XX50 data is not uploaded on NSE website prior to August 2013? Or there is some other reason. Please help. Thanks.

HI, sir
I have read this module….its really superb
my question is i short irrespective of put or call in illiquid stock and hold till expiry, the strikes wont open due to liquidity issue
end of the expiry will I be in Profit ?

Hi, sir
There are are different Iv in all strikes, according to Option theory when IV is high Option Premium would be high and vice versa.
so at ATM IV is lower than OTM option, but premium is higher than OTM…..this statement is little confusion please clarify

Hi,sir
We are very great full to you for giving such precious informations.
I have attended so many classes they taught only about some indicators after studied this modules I have got a lot of knowledge
Initially I got loss but I wanted to be a Professional trader so I didn’t loose my hope and was searching for what I want to learn to become a successful trader, now really got the answer. Now confident level is increasing…….Thank you so much

Hi Karthik.
I’m new to options. I have a query.
Date 19/01 I take a call. Premium 1.2 strike price 95 spot 89. Exp 28/1
On 20/1 can I sell the option. Premium shows 1.5 spot 89.5 but has not reached the strike price. Will I be profitable I.e. diff in premium * lot qty or will I be losing the whole premium.

Thank you Karthik and also would like to say you have a wonderful module and you make learning very simple. Options sounded like greek when people spoke about it now it makes sense after reading first 3 chapters . Guess i got a long way to go.

Hello Karthik,
I am a newbie just trying to get into the markets. I have been reading various articles and have just started going through your lessons. The explanations are extremely lucid. There are so many different ways and means of playing the markets that it really is confusing for a newbie just trying to figure out where to start and what to do or not to do.
Basically I need to know the following:
1. In Chapter 19 you have suggested that a beginner start with Swing Trading and then graduate to Intraday. (great advice for me)
2. Should a newbie trade in individual stock (after doing required research as per your suggestion) or should one trade in NIFTY Index Lots
3. Can a newbie start with Options as I found the concept interesting (But is it advisable to start Options as your first step in Trading?
Would be much grateful if you could give me a clear Roadmap on what to start off with so that I can get a sense of direction !

1) Yes, if you are new, please stick to swing trading (or anything which prompts you to hold positions longer)
2) Nifty index to begin with and move to Nifty 50 stocks at a latter point
3) You can directly start with options.. ho harm with that, but please be very clear about option’s payoff.

Option payoff is non linear, unlike futures which is linear. This holds true for both option buying and selling. One needs to be aware of this along with its characteristics in its entirety.. only then one would stand a chance for a long and successful option trading career.

Hi Karthik,
Plz suggest me regarding nifty index option that which strike price should I choose from related to spot price(otm,ATM,inm).I also want to know whether the premium of call option will get reduced nearing to expirydate, if it so can I exercise my contract and make profit out of it?
Since i am a newbie to share market as a whole, plz clarify me about this.
From where I can read your options lessons?

The feeling I get from going through your modules is similar to someone bringing you a bottle of chilled water after knowing that you have been stuck in some desert for two or three days without any water or food. Keep up the good work. Now this is what I call the “joy of learning”. I pray for your well being.

Its very impressive exaplanation abt options . but sad thing is i am going all these self explanatory materials after loosing more amount in Stock options by following so many advisory calls/tips and wasted some more money for their service .in last six months i am into F&O Segment and wasted more money .

can u suggest me
a) which one one is better ? trading in cash / Futures? which one minimizes the loss ?and can give better profit in intraday/positional ?
2) Options selling is safe and better one than buying ?
3) how can we calculate which strick price ( ATM / OTM ) we have to choose to get profits ?

1) If you area beginner, I’d suggest you stick to cash positions and hold your trades for multiple days. However if you are particular about intraday, then derivatives is the best option. Also, to minimize losses you could try hedged position in options. We have discussed various strategies here – http://zerodha.com/varsity/module/option-strategies/

2) All else equal, option writing is considered safer. But then it depends on how and why you are writing options.

hi sir
like futures, here in the options trading whether the buyer of the call option can exercise the option and exit before the expiry and book profits by selling shares in spot market OR have to wait till expiry. please clarify this doubt sir

Hi, i am new to option…. read your documents and able to understand a bit in my way…. I little bit understood the concept but i do not know how to implement like … say my prediction for the next week is that Buy at 8579 tgt 8618 and if short then short at 8529 with the target of 8491 now who me to place this in the option…… what to choose in CE and PE
Need you support Mr. Karthik Rangappa

As you read through this module, you will realize that we discuss everything with respect to strike selection. So my suggestion for you is you should read through the entire content and you will be clear on selecting the right strike.

I HAVE 1 LOT OF SBIN JUL 240CE WITH ME.I HAVA PAID RS 8000 PREMIUM AT 2.65 PER 3000 shares.IF ON THE LAST THURSDAY SBIN WAS TRADING AT 250/_ WHAT WILL BE THE PROFIT I WILL GET??3000*10=30000/_ OR 30000+8000=38000.8000 WAS THE PREMIUM PAID
I HOPE U WILL SOLVE MY QUERY??

SIR
I HAVE SOME DOUBT
LUPIN TRADING AT 1730
LUPIN AUG 1750CE AT 59
LUPIN AUG 1700CE AT 84
IF I BUY LUPIN AUG 1700CE AT 84, MY BREAK EVEN VALUE IS 1784
IF I BUY LUPIN AUG 1750CE AT 59, MY BREAK EVEN VALUE IS 1809, THEN OBVIOUSLY I GO FOR 1ST ONE.
MY QUESTION IS WHY THESE DIFFERENT OPTION ARE TRADING IN THE MARKET.

Dear Sir,
The Hindi translation is word to word, by this approach it lost the message/meaning of the real intend of subject. Request to think about that please let me know if I can do it for you…Thanks

That will depend on the premium of the put option. When markets crash, the put premiums tend to go up and therefore your futures position is hedged. The real P&L will be known when you know the premium for the Put option.

In case of Nifty options, is the underlying the Nifty 50 Index or the Nifty Future Contract for the month?
Which one do you think is more appropriate for analyzing the positions to be taken in options contracts? Should I be indifferent between the two?

Sir,
Today I wanted to purchase infy CE and purchased 1 lot 1240 CE at 2.90. But immediately after this, mtm loss is shown as 2650. I purchased 2 lots of December contract. When I asked, I was told that this is due to bid ask spread. Bid is 0.05 and ask is 2.9.
The reason why I purchased is because of low vix. Will the bid ask spread narrow down? Or to break even how much should the premium rise to?

Sir, how do we measure liquidity? Suppose I want to buy 20 lots. Then roughly what should be the minimum lots in open interest and minimum lots in bid and ask prices to be called as sufficiently liquid?

After knowing above Call option basics , i think to deal with Future Trade is more suitable than Call option. i mean if we trade in future trade with Stop loss don’t u think it has same features like call option ?
if future trade we can fix our loss with stop loss option , but here with call option we have to loose all Premium cost if we exercise wrong. what is your opinion on this.

hello Karthik,
I have doubts about what are the way can I buy stocks in calls option,
1) one person from zerodha said ” you can trade options before expiry date” ….. is it true????? if it is true why you not mentioned in pdf
2)is it premium only taking role in calls option(buy or sell by using premium only) so what’s the use of strike price
3) how I extend expiry date for my stock
4)after I buy my stock on expiry day is that can I carry ….. or it should be sold on that day??

Sir,
Lately I have been trying to learn about options from various material and I believe that your’s content is absolutely one of kind;Truly enjoyed the explanation with the example.
I have one question
As mentioned in summary point 8, shouldn’t it be that option buyer benefits when the prices are greater than (strike price +premium)

Hello sir,
Thank you so much for teach us in this systematic and logical way it
sir as i am reading through this module i have lots of misunderstanding one of such is this
Suppose i short a OTM CE option say Delta at 0.275,strike 3100 and spot is 2975
And premium for this is 17
and 8 days to expiry a
sir my question is that as we know when someone buy a CE for whatever premium
he profits from increasing premium say if premium shot up from 17 to 29
then his profit will be 12 points and have option to close or transfer his possition
Before expiry and keep 12 points as profit but from SELLERS point of view is premium variables . I mean can he close his position before expiry and benefit from premium fluctuations or he has only two way to stay in trade
1. stay in trade till Break even point (Assuming he does not want to loose anything)
2. stay in trade till expiry and keep 17 as profit if option expires worthless
Sir i want to ask you is there any other logic available to stay in trade except above two
Or is seller can benefit in any other way .
I have to say understanding options from sellers prospective is confusing for me may be due to i knew to options. Sir i request you please try to upload some extra supplementry notes for shorting options regarding their pay-off
Lastly i cant explain in words my thanks to you for every thing you teach me
Stay healthy and keep rocking…..🙏

Ankit, the same is applicable for sellers also. They can write or sell option and get of the the trade very next minute or they can choose to hold on to the trade till expiry. The best way to learn this is by experiencing it once. I’d suggest you short an option, hold for few mins and close the position. Dont worry about the P&L, think of the it as a small price you’d pay for learning 🙂

I’d be doing a webinar shortly on the same topic. Good luck and happy learning.

Dear sir After call option buy there is also one more chance for the price ie CMP can be more than Strike price but LESS THAN strike + premium paid in which case if exercised then the buyer can MINIMISE the loss in the way of premium paid

Sir,
I bought a lot of nifty option, a premium of 130 rs per share for Nifty Jun 9350 CE . The premium has increased to 138 on the same day will i get a 138-130 =8 rs profit that is showing in the Position in Kite .
I’m confused because the current price is “9353” which haven’t crossed the strike price+premium but showing 400rs profit in positions in kite, but the premium has increased from 130 to 138. Will i get 8 rs profit on the same day?

Your profitability of Strike + premium is applicable if you hold the position to expiry. However, before the expiry your profitability is the difference in premium. So yes, you can pocket the profit of Rs.8 by closing your trade.

Hi Karthik,
I have a query , Strike prize should be a price which is min. of what you think can reach
E.g Jindal Steel is traded @ Rs. 125 & I expect Jindal Steel will touch 150 max by June’17 expiry,
My question is should I by Jindal steel by paying premium for 150 or Should I buy Jindal Steel by paying premium for 140 ?

Strike selection is a very tricky process. It is not just about the price, it also depends on volatility and speed at which the market moves. Suggest you read through this module to get a fair sense of how it works.

Dear Sir,
Who makes options or futures contract? The stock market or the respective companies? We know that companies releases shares in the market when they have requirement of funds. But who releases the option and future contract to be traded in market? or is it done by the trader themselves when they have a view?

Sir,
In the example given above if Venu decides to settle the deal with cash instead of selling the land directly, Ajay will be getting 4 lacs and Venu gets to keep the land right?
Now from Venu side, these are the calculations right,
Amount received as premium is 1 lac
Amount paid as a part of the deal is 4 lacs
Now he still gets to keep the land and if he sells it to some third party, then he would be getting 10 lacs and subtracting whatever he spent earlier, he would be left with exactly 5 lacs. But instead if he choose to give away the land, he will get to keep only 1 lac and 5 lacs paid to him as a part of the deal. Now finally he gets to keep 6 lacs with him.
Should this mean he should always sell the land instead of settling it with cash?

He can choose to do that, this is an example to convey the concept along with introducing the concept of cash settlement. In India all options are cash settled, hence it makes sense to stick to cash settlement.

Hi,
A question related to options traidng. For example, currently NIFTY 9900 AUG CE call option is showing in zerodha as Qty 75(LOT 75). So for example if i place a buy order of LMT price of 40 and Qty as default &5(LOT 75). How much funds will be required for this call buy transaction? Will it be 75*40(Rs.3000) or just Rs.40. Is the current price shown for the options for a single contract or for a single LOT(75 contracts)? Please explain the meaning of LOT and how its related to current quote price.

1. If I book profit on next day
Profit = (4.5-3.6)*1800 = 1620(minus brokerage and etc.)
2. If I wait till expiry and spot trades above strike say 383
Profit (383-380)*1800 = (5400-6480)(minus brokerage and etc.)
*383.6 will be the break-even point as you’ve mentioned.

3. If I wait till expiry and spot trades below strike say 375. Premium must be trading at higher levels(compared to 3.6) since spot is near to strike price and I can book profit instead of waiting for expiry and go premium in vain. Is this reasoning correct?

Anyone else who has sufficient knowledge can also clarify these things.
Thanks.

1) Yes, thats correct
2) Thats correct again. 383.6 will be your breakeven
3) The closer you get to expiry, the close should be the spot to strike. Say if there is 1 day to expiry and spot is at 375, then 380 CE is likely to trade below 3.6….my guess is maybe about 1 or max 2. You can use the B&S calculator to get the exact value – https://zerodha.com/tools/black-scholes/

Ajay’s profit in the Call example is not plain Rs 400000/- . He had paid Rs 1L 6 months in advance . We should also consider Time Value of Money.Hence the Interest cost (opportunity cost ) should also be factored. Assume he can gain 20% by investing in equity per 6 months, he seeks to lose this profit by blocking his capital for the land purchase . So effective profit would be ( Rs 400000 – Rs 20000 which is Rs 380000. Again if he can put the 1L to much more productive use in other avenues say his business , profits would further reduce to that extent.

In F&O Margin calculator page when i try to calculate Options- CALL/PUT Buy the amount shown is Rs. 0 …Why is it so?
is it that i only page the premium amount and no margins locked? ex: for Nifty CALL Buy at Strike X, if Premium is 50, then i pay 50*75 =Rs 3750. Is that all and no Margin is blocked?

Very useful write ups provided by u. We could not even learn in class paying huge amount. Thanks for providing such detailed information.

I have 1 querry i.e. If we get profit in CE will it be credited to our a/c with premium paid to seller ?
Secondly If i buy a call at Rs. 8.50 for 870 strike price for lot of 1000 shares, and if next day for same strike price premium is going on for Rs. 9.00 per share the lot may be different i.e. 2000 and expiry date is same, can I sale it for Rs. 9/- and earn profit of rs. 1/- per share. Whether my premium also will be credited?

Your essential guidance encouraging to do different type of Trading Carefully.

Recently I am going thru your Technical Analysis Module which gives pleasure in reading and understanding. Your modules are as good as you are teaching in class, that much effective information is provided and hence a Lay Man like me can get understand the tricks of trading.

Zerodha Support Team is not replying to my email regarding incorrect data of FNO in Q-BackOffice. It is now 8 days and sent 3 email reminders. Can you please ask why they are showing so unprofessional behavior.

You replied below query but not mine. My query can be very silly for you therefore you may not have replied but I am Zerodha’s customer. I am still learning after studying all the theoretical now I am doing practical. And I am noticing bugs in profit calculation therefore asking you to clarify my doubt. In fundamental chapter you teaches never invest in company which don’t have ethics even with good financial ratio. Now I am stuck what should I do ?

Really very nicely explained chapters, I am still going through the chapters.
I had just a simple query regarding Bank Nifty.
Bank Nifty as the name suggests is group of banks that decide Bank Nifty Index.
I had checked various sites & all give different factors deciding the Bank Nifty & if one follows the Banks only
it can not be correlated with Bank Nifty Level.
Will you please indicate different parameters , stocks etc. deciding the Bank Nifty Level.
Please suggest.

The article is super and your patience in answering each comment here is commendable too.
This is the first article I read on your site and am interested enough to start at Module 1, chapter 1!
Thank you, Karthik, for your efforts in creating and maintaining this varsity.

Hey
In the case that the land price remains 5L, Ajay should be neutral and not opposed to buying the land. In fact, the amount paid as premium should not factor into his decision on whether to buy or sell the land.

SIR,
I WOULD LIKE TO ASK 1)WHAT ARE TRADING TIMING OF FUTURE AND OPTIONS
2)CAN I BUY NIFTY OPTIONS FROM 9:15 AM
3)OR I HAVE TO WAIT TILL 9:30 THEN HOW DOES VOLUME CHART SHOWS ACTIVITY BEFORE 9:30 IN DIFFERENT
STRIKE PRICE
I WOULD BE THANKFULL TO U .

I NEED SOME INFORMATION ON PE AND CE , SUPPOSE XYZ STOCK IS IN CURRENTLY IN BULLISH TREND , 1)THE THE CONTRACT NAMED CE GOES UP AND PE GOES DOWN , IS IT RIGHT . IN THAT CASE I CAN MAKE PROFIT EITHER BUYING CE NOR SELLING PE.
2) IF I TRADE ON INTRADAY DOES THE AMOUNT GETS WASH OFF IF I AM WRONG SIDE OF MOMENT OR I INCUR LOSS BY PREMIUM
DIFFERENCE
3) IF I WANT TO EXIT IN PROFIT IS IT MUST HIT STRIKE PRICE

1) Yes, this is generally the case – if the stock goes up, you make money by either buying the call or selling the Put.
2) Yes, you will get residual value
3) If the premium is more than what you’ve paid, then you can exit and book profits.

Sir,
1) Suppose i buy call of share/nifty at start of month at premium of Rs. x. Then is there are any chances that my premium value comes to zero? (i think if nifty spot or spot value of share sharply comes down then premium may come to zero) Am i right?
2) What will happen with my contract in case premium comes to zero?
3) And in next some sessions if premium again goes up then whether i will be able to square off my position? or contract automatically gets expired when premium comes to zero?

1) This can happen if the spot decline wrt to Strike (in case of CE) or if the Spot increases wrt to spot (in case of PE)
2) It will be worthless
3) Yes, you can. In fact, you can square off anytime before the expiry

1. Here margin required is 75*15 = 1125 right ?
2. Is this margin required ” 1125 ” same in Day trade as well as SWING trade ?? I am confused .
3. Suppose 1 day before expiry it is trading at 50 CE. then I am in profit , i.e = 75*(50-15) = 2625 ?
4. Suppose 1 day before expiry it is trading at 5CE. then I am in loss , i.e = 75*(15-5)= 750 ?
5. Suppose in swing trade , I am in loss in this contract and did not close my position on expiry ON 3.15pm.
What happens to my position and also what are the TAX implication IN THIS EVENT ?

1) Yes
2) This is the premium, once you pay, you can carry forward the position until expiry
3) Yes
4) Yes
5) The position will close and get settled based on the premium. Capital gains will be taxed based on your income bracket. Suggest you read this module on taxation – https://zerodha.com/varsity/module/markets-and-taxation/

Hello Sir,
I have brought 10 lots of Nifty50 of strikeprize 10800 (Expiry – Jan 2018) with 37 prize, now its trading at 22, i have a question, what if market trends down and this prize goes to ‘0’, I may loose my 10 lots or it will in my account till expiry?
And also if market trends up again till Jan 2018 my prize also goes up?

Sir,
Today I purchased HDFC BANK call option of exercise price 1860 in morning. And as per expectations price and premium goes up therefore i wanted to book profit. I was entering exit order at market price but everytime order was getting rejected. When we buy option we have right to exercise it any time then why my order was rejected? After entering exit order for minimum 100 times my sell order gets executed n i earned profit.
So, please tell me whether i was doing any wrong process or there is something about call square off before expiry which i dont know.. 😛
Sorry for asking silly problem..!

Sir, I was not getting any error. But when i was clicking on exit position and sell option, immediately in notification “rejected” was coming. At end instead of selling at market price i clicked on limit price that time my order gets executed. i was also shocked.

Ah, I get it. We do not allow market order for stock option, it has to be a limit order. This is because of the lack of liquidity and the associated volatility. Also, whenever an order is rejected, there will be a rejection reason which is displayed. That will give you the information.

1. Banknifty freeze qty is 2500 per order, on the day of expiry the premium’s are very low, so if I want to buy say 10k lots, do I need to place order 160 times or is there a way to place the order in 1 go?

2. Is it easy to sell this huge qty on expiry day?
3. What’s the max amount that can be traded by retail investors in options?

As you have mentioned in the module (Call Options), the loss is limited to the premium that we paid.

For example:
I bought a call option of Tata steel thinking that the stock will go up – Premium paid = 3000
But the stock price did not go up. Infact it went down.
Since the price went down, I did not sell the stock as i do not want to take more loss.
The contract expired.

In this situation, as per the module, i should be loosing only 3000 right?

I have noticed, during the course of some sessions, the Nifty/Banknifty options – almost all Strikes of both PE & CE both fall in value even tough Nifty/Banknifty itself has made a movement but sideways. Theoretically, when PE increases, CE should decrease and vice-versa. But both PE/CE falling for almost all strikes , i dont understand why? and how to deal as a trader during such sessions?

Options premiums have multiple forces acting on them simultaneously. The direction of the market is just one of them. I’ve explained this later in the module, suggest you read through. But the answer to your query is because of Volatility. Increase in volatility increases option premiums and vice versa.

thanks for the quick reply, appreciate if you can clarify below doubts for me. 🙂

1)
Assume i bought a call option of Nifty 50 index (Normal/CNC) on 10-Jan-2018 with a premium of Rs: 4.2. the contract is going to expire on 25-Jan-2018. as of 19-Jan -2018 the premium of option is Rs: 19.8.

Now can i square-off my position at this stage or do i have to wait mandatory till the contract expire.

2) can i Buy a CALL option / PUT option of any “stock option” in normal and close my position after few days before the expiry date? and if Yes i can, then do i have to pay anything extra apart from premium of the stock option which i bought.

Please clear my doubt regarding options trading. Suppose, a stock is currently trading at ₹100 & say its 110CE is trading at ₹1. I purchase 1 lot of the same. In the next couple of trading sessions, the stock price goes upto ₹105. Simultaneously, the 110CE price also goes upto ₹5. Can I book profit by selling that 1 lot even though the stock has not hit the strike price?

Thank you, Karthik. Actually, I had purchased 1 lot of Federal Bank Jan 110CE for Rs.1.15. Two days later, it went all way up to Rs.4.30, but I did not square off my positions thinking that I could do it only after the underlying goes above the strike price. Finally, it expired worthless resulting in a loss.